Overview

The funding environment for early stage startups has been shifting for some time, but as shifts accelerate, founders, executives, and investors should look to reassess their strategies to ensure that they remain optimal in a capital constrained environment. Q2 2016 saw the lowest rolling 12-month average deal flow for early stage investments since Q2 2013, this in spite of actual early stage dollars invested having increased by 127% over that period. Increasingly, early stage investors are looking to place fewer but more sizable bets on startups that are perceived as having the most promise. This can, and likely will, lead to a widening gulf between early stage startups that have a clear path to additional funding and those that may struggle to generate investor interest.

Source: PwC/NVCA MoneyTree™ Report, Data: Thomson Reuters

This change is being driven by a number of factors, including venture capitalists hitting bandwidth limits (even for the most talented of multi-taskers, there are only so many investments one can effectively manage), maturation of certain investment theses (notably “Uber for X” models and consumer focused mobile apps), and the changing funding environment that has allowed early stage VCs to seek a level of market traction that in years past had only been expected of more mature startups. As a result of these changes, the business press is increasingly flooded with stories of well-funded startups failing, seemingly out of the blue, as anticipated follow-on funding rounds fail to materialize, and angel and VC investors pivot to focus on companies with a clear path to cash-flow breakeven. In this kind of funding environment, what is a startup entrepreneur to do?

The good news is that, regardless of funding, the levers of sustainable value creation have not changed. Companies that provide differentiated, value-added goods and services to their clients are companies on a firm foundation. But every good strategy must take into account the resources available for that strategy’s execution, and as the early stage funding market shifts, startup leaders must take the time to objectively assess their current situation and look to chart an optimal path.

For those startup entrepreneurs concerned about the near-term future of their companies, assessing a company through the following three lenses can instill a disciplined, value creating mindset that is well suited to a shifting landscape:

Cash Management. Too few startups understand the drivers of their company’s cash flows, and every report of well-funded startups abruptly failing without sufficient funds to cover employee payroll (a failing that could leave employers facing criminal charges) highlights this failing. Management should understand the near-term sources and uses of cash if there are no changes (“base case”), identify steps to conserve cash if needed, and have a clear sense of the amount of time the company has before the cash runs out.

Business Model. While the effort to attain product market fit gets more press, developing and refining the correct business model is a key milestone for every successful venture. The ability to demonstrate a viable business model will significantly enhance the options of any startup.

Goals. Are the current goals in-line with the company’s current cash situation and stage of business model development? A rule of thumb for liquidity constrained environments is to never count on new funders. If your current investors would be unwilling or unable to invest follow on amounts, plan accordingly.

Conclusion

Funding does not create good companies, but a lack of funding coupled with a persistent cash burn can kill any company. The key to avoiding this fate is acknowledging the possibility and taking steps to objectively assess, and if necessary modify, a strategy before it is too late.

■

About the Author – David Johnson is a career change agent who has served as an advisor, board member, interim manager, investor and operator at organizations ranging in size from pre-revenue startups to Fortune 500 organizations. David is a frequent speaker and writer on the topics of value creation and performance improvement. He can be reached at david@abraxasgp.com or 312-505-7238.

Chicago Venture Magazine is a publication of Nathaniel Press www.ChicagoVentureMagazine.com Comments and re-posts in full or in part are welcomed and encouraged if accompanied by attribution and a web link. This is not investment advice. We do not guarantee accuracy. It’s not our fault if you lose money.